What It Felt Like

In case you were too young for the dot-com bubble, this is what it felt like. Stocks rocketing higher every day. Have you seen a chart of Intel lately? Madness.

Madness prevails.

My friend Jason Goepfert lobs a grenade into the mix:

Jason is hedging. Of course it matters. But it won’t matter until it matters.

And then we have this:

No caption here.

What is going on is highly unusual. Stocks are now (as of the time of writing) up 17% since the March 30 lows. In 29-odd trading days. I have never seen anything like it, and I have seen a lot. This displeases me because I do not currently have any exposure to semiconductors or the stuff that is going up (except for emerging markets). In fact, some portions of my portfolios are performing quite poorly. They were performing just fine a month ago!

I am writing this from Santa Fe, New Mexico, at 1:45 in the morning. I can’t sleep because of the altitude. And I’ve been awake since 3:30 am EDT, about 24 hours ago. I’m a little punchy. Whenever you see a move like this in the markets, you want to be on the right side of it. You sure don’t want to be on the wrong side of it. I’m not getting hurt, really—but I’m not participating. The Intel chart is particularly galling, since I was long the stock four years ago—with the correct thesis.

Is It 1998 or 2000?

Former Bridgewater portfolio manager Andy Constan is now calling the stock market a bubble. I agree with him. The question then: Is it 1998 or 2000? It’s fine to think the market is a bubble; a lot of people do, but what you do about it is another question entirely.

You have probably heard the story about how Druckenmiller bought the highs of the dot-com bubble, vaporizing $3 billion in a matter of weeks. Even the pros can make mistakes like this. I will say that I have no interest shorting it until I see some signs of weakness, or at least consolidation. You do not want to short a stock like this. Kind of how you don’t want to catch a foul ball at a baseball game with your bare hands—it will hurt like a mother. You wait for it to stop rolling, and then you pick it up.

Last week, I was pulling up charts from 1987. Just to see what they looked like. I’m not sure if you know this, but the S&P 500 was having an amazing year in 1987 before things fell apart in the late summer. It was up 40% year-to-date in August. Jason Goepfert would seem to imply that we’re approaching a generational top.

What’s the Other Side of the Argument?

Well, maybe the war will end, and maybe AI is actually not a bubble, and maybe the SpaceX IPO is going to be the biggest food fight ever. Maybe all those things and then some. Maybe the bull market really will last forever, or at least long enough that it is functionally forever. There are always reasons to worry about stocks. I don’t worry about the reasons—I worry about the technicals. When the market goes vertical like this, for which there is little precedent, it typically doesn’t end well.

I lived through it. Lehman Brothers decided to hire me in November of 2000, several months after the peak. They hired 300 MBAs that year, and Joe Gregory told us all in Windows on the World that we were the last ones in. The layoffs began in earnest the following year. Lehman hired 10 MBA associates into the equities division—within a year or two, I was the only one left. Right now, we know what it feels like when the market goes up every day. I also know what it feels like when the market seemingly goes down every day. I have lived through both. One usually follows the other. The exception here was 2007, which was not a valuation bubble; it was something different.

A wise man once showed me a chart of valuations by percentile and the 10-year forward returns. The market is, more or less, at the highest valuation in history, meaning that the 10-year forward returns are usually zero or negative. Weird stuff happens in bear markets. Around the time of the financial crisis, the best-performing mutual fund belonged to Van Wagoner, which had previously held the title of the worst-performing mutual fund. It had invested in a bunch of busted-up value-ish small-cap stocks, and when the market was cratering, that was the only thing that was working. Our job, as investors, is to figure out what the only thing working will be so we have a place to hide.

If you’re at a loss for what’s going on, don’t worry. You’re not alone. I do know one person who predicted this. He is positioned atop one of the big multistrategy hedge funds. He is gifted, and probably lucky too. Everyone else had the sense to pile in when it was apparent that the market was going vertical. I didn’t even have the sense to do that. I think the best the bears can hope for is that the market will go sideways and consolidate for a few months.

Being a technician, I think of things in terms of technical health. Up until this point, the bull market was technically healthy. Now it is not. We have entered bizarro-world. Your ability to trade this probably depends on how old you were 26 years ago.

Jared Dillian, MFA

P.S. You must—must—check out my latest mix on SoundCloud, “The Girl You Know.” I’ll give you a German Shepherd and a slice of cheese if you do. A little over an hour of high-quality melodic house, the stuff I love to play. Big tunes. And if you navigate to that SoundCloud page, give me a follow while you’re at it—I’m getting close to 3,000 followers.